Is is Right to Do That? A Look at Finance Ethics Around the World

Meir Statman
Glenn Klimek Professor of Finance

Paul Bond is an attorney whose law firm is advising one company on the takeover of another. Though Bond is not involved in that project himself, he overhears a colleague say that the offer for the target company will be $120 a share. Based on this knowledge, he buys 1,000 shares at $70, expecting to turn a quick and substantial profit.

Is Bond’s behavior ethical?

It turns out there’s a wide range of opinions, depending on the country where the question is asked and whether it’s asked of college students or finance professionals, according to research done by Meir Statman, Glenn Klimek Professor of Finance at Santa Clara University. Statman published the results of his study (“Local Ethics in a Global World”) in the May/June 2007 issue of the Financial Analysts Journal.

Statman has been awarded the Finance Research Excellence Award by the University of Notre Dame and will present an expanded version of his paper this fall at its Ethical Dimensions in Business conference. He hopes his findings will stimulate deeper and more practical discussions on business ethics and how to improve it.

“Conversations about ethics in business tend to be sterile and based on abstract principles drawn from philosophy,” Statman said. “There’s too much preaching, too much self-righteousness and hypocrisy, and too little knowledge of actual perceptions of ethics and how they vary among countries and within them.”

Working with colleagues abroad over several months, Statman posed the Paul Bond question and others to finance professionals and college students in the United States, Australia, India, Israel, Italy, the Netherlands, Turkey and Tunisia. Cultural adjustments were made by location, so that, in India for instance, Paul Bond became Pesi Bhabba.

In the U.S. and the Netherlands, only five percent of finance professionals said Bond’s behavior was acceptable. That rose to 16 percent in Australia and Israel, and then jumped to percentages in the forties in Italy, Tunisia and India and to 56 percent in Turkey.

In every country surveyed, students were more likely, often by wide margins, to approve of Bond’s behavior. In the U.S., 36 percent of students found Bond’s behavior completely fair or acceptable, and in India and Turkey the percentage approving was in the seventies. Statman said he can’t say for sure why students are more tolerant of such behavior but suspects that, unlike the professionals, they haven’t yet been fully schooled on the law prohibiting insider trading.

"If you want to raise ethical standards, raise income first."

—Meir Statman, the Glenn Klimek Professor of Finance

The law, however, is not a sufficient solution to the insider trading problem, he said. Insider trading is illegal in all the surveyed countries, but it is widely perceived as acceptable in many countries. Norms of fairness as well as levels of trust and freedom from corruption are part of “social capital,” and that capital varies from country to country. “In a society where people cheat where they can,” said Statman, “business enterprises are often limited to family because others are not trusted.”

Social capital does accumulate and ethical standards can be improved. Globalization promotes social capital and so do income, education, and law enforcement.

Tainted food and lead in paint are not new in China, where social capital is low and trust is rarely extended beyond family. But China is learning quickly that its businesses must improve their behavior if they are to sell their products globally.

Corruption tends to be higher where incomes are lower. In his surveys Statman found that insider trading is more acceptable in countries where incomes are lower. Ethics, it seems, is a luxury. It is relatively easy for us in our wealthy country to return $5 paid in error by a store clerk since the warm glow of ethical behavior is worth more than $5 to many of us. But it is not as easy to do so when $5 is what one can earn in a day or a week.

“If you want to raise ethical standards, raise income first,” he said. “Once you make people prosperous, they want cleaner air, safer food, and higher ethical standards in business and government.”